Where does the money come from?

As the title says really. Whenever I take a winner trade and make profit, where does the money come from? Is there [U]always[/U] someone (a person, a company, a bank?) on the other end losing the money I earn, and vice versa earning my losses?

Been pondering on this for a while now, but just can’t get my head around it… If someone could clarify, or perhaps post me a link which could enlighten me I’d appreciate it!

Short answer is “Yes”.

Long answer is that every position in retail forex trading has someone on the other side of it. If you’re long, somone else must be short, and vice versa. If you gain, they lose. If you lose, they gain.

rhodytrader, thank you for your quick and clarifying answer! It really is the way it must be… I had at one point a silly idea/suspicion that forex was “creating” money! Would have led to an mean inflation, wouldn’t it… :stuck_out_tongue:

Simplistically, for every winner, there is a loser.

What I’m confused about is what happens if (unrealistic scenario) I want to go £100 million short on some random un liquid pair … will the broker have to find someone to go long for the equivalent amount before even if they offer a wide spread? What happens if there is no-one?

Assuming your broker will even do a trade that size (most retail brokers won’t), you can be assured that the rate you’re quoted will account for the broker having to offset that in the market.

Perhaps my example was not very realistic, but what I was trying to question was there can’t always be equal amounts of sellers and buyers … so how does this work if you want to go long and no-one wants to go short?

I would say that the broker is not looking for a trader on the other side to fill in your order.

You buy from the market, not from one specific individual.

If you’ve been winning, the money has been coming from me lately ;-p

or ME!! My account is a little lighter this week. :frowning:

There doesn’t have to be someone specifically going short. The other side can also be exiting a long trade, and booking profits by selling.

Think of it like your lots are batons in a track race, only there are runners in both directions. Sometimes you’ll pick up a baton from someone going the same direction as you, and sometimes, you’ll get the baton from someone coming at you. It makes no difference.

As for huge lot sizes, there may be many traders making up the other side of your position. The math balances, or is hedged appropriately by your broker.

For a trade to be done there must be someone (or many someones) on the other side. If you’re looking to go long and there are no shorts then you have to raise your price to find one. If you’re dealing with a market maker they are setting a price based on their willingness to get short. If they aren’t particularly eager, they will mark their price up. If they’re already overly long and looking to offset they may edge their offer lower to encourage buyers.

Technically, someone closing a long is actually entering a short that offsets their existing position, so from that perspective you’re incorrect.

I realize, though, that what you’re saying is the person on the other side of your long trade need not actually be short when it’s done. That’s true. However, because there has to be a short for ever long, that means someone else in the market is on the other side of your trade. Think of a three person market. Trader A is long with Trader B on the other side short. Trader A decides to exit his long and does a trade with Trade C. Trader C is now long with Trader B as the short on the other side of it.

If you buy something or sell something, then you are doing it with your broker. Your broker might be the buyer or seller or they may hedge it trough a bank or they handle your trade through a bank (stp) or it can be that other traders are on the other side. Plus it can all be mingled in one pot. So, if you sell for 10 lots it could be that the broker buys one lot of yours, the bank is buying 4 lots and other traders are buying 5 lots all together.

Regarding liquidity: The liquidity is already so high with major pairs, that it would probably be difficult to find no other player until you really reach high lot sizes like say 100+ lots or so. However, if that becomes the case, you are more and more for yourself becoming a market maker. That is, you are now looking not for price moves to jump after them. You are MAKING price moves then and are looking to hide your moves. Typical strategies to hide your huge moves then is splitting them in parts of smaller moves.

But even to offset their long position by selling, they need a buyer right?
Whether that buyer is closing a short, or opening a new long should be immaterial.

Your three trade setup tells me we are saying the same thing.
Thanks for clarifying :slight_smile:

Think of it as zero sum game. If a person wins, another losses. There are always people go long and short for the same currency pairs.

Think of it like your lots are batons in a track race, only there are runners in both directions. Sometimes you’ll pick up a baton from someone going the same direction as you, and sometimes, you’ll get the baton from someone coming at you. It makes no difference.

I like this simple analogy, makes it easy to visualize!

If you buy something or sell something, then you are doing it with your broker. Your broker might be the buyer or seller or they may hedge it trough a bank or they handle your trade through a bank (stp) or it can be that other traders are on the other side. Plus it can all be mingled in one pot. So, if you sell for 10 lots it could be that the broker buys one lot of yours, the bank is buying 4 lots and other traders are buying 5 lots all together.

So your broker divides your buy on many sellers? nifty! It’s all coming together for me now! Thank you all for answering!

Not necessarily, it can be only one as well.

Technically yes, but not actively if it’s not he who is on the opposite side of your trade. He just handles your orders then and others decide of their own what they do.

It’s like say you offer 10 single silver coins on Ebay. Whoever sees your offer can buy it. All 10 or part of it. Even Ebay can buy. Ebay for itself just handles your offers etc. etc. technically. Plus they get some money for this. Like you broker does with spread and commissions.

And all of this is how spread is created. If the broker cannot find a seller for a buyer the money is held until one is found which causes slippage and requotes depending on your borkers rules and software. That is why spreads go up during news. Its not the broker manipulating the spread. Its the market itself dictating supply and demand. If everyones selling there are no buyers so the spread goes up until the buyer is found.

With fixed spread brokers you will get requotes and slippage due to the fact that the spread far exceeds what the broker is fixed at. In a variable rate broker you will get filled at a not so desirable price using market orders. This supply and demand will also create gaps.

I dont think it is true that trader A has to lose money for trader B to make money, it is entirely possible for traders to go long at the same time and at the same price as other traders are going short and both sets of traders to close at a profit.